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In the US stocks traditionally have sold on the both exchanges and over the counter.  An exchange is a central location where buyers and sellers come together to trade.  Many cities used to have their own exchanges the largest of these was and still is the NYSE.  Many of the other exchanges have fallen by the wayside but there are still several “regional” exchanges including the Philadelphia Stock Exchange, the Chicago Stock Exchange, the Boston Stock Exchange, and  the Pacific Stock Exchange, .
 

NYSE

The NYSE is the best known of all stock markets.  It is located on Wall Street in New York City and can trace its roots back to the 1790s when trading was done under a buttonwood tree.

The NYSE makes use of a specialist.  A specialist is a member of the NYSE who is responsible for the trading in one or many  stocks.  The specialist is a dealer who can trade on his/her own account.  The specialist maintains a special limit order book which lists all orders that are coming up.  A specialist makes his money by trading and not by investing.  The specialist must occasionally take the opposite side of a trade to offset market imbalances.  That sid the vast majority of trades (upwards of 90%) take place without the specialists help.

For more on what a specialist does, check out the web-pages of Spear, Leeds & Kellogg a specialist firm on the NYSE and AMEX.

For most of modern history the American Stock Exchange has been the second most widely known exchange.  It is known as the curb market since it began trading at the corner of Wall and Hanover Streets in NY city in 1849.  It moved into a five-story building in 1921 and its ticker service became famous for its ability to transmit 300 characters per minute.  In 1998 the merger between the NASD and the Amex is completed (data from Nasdaq-Amex Backgrounder).

The Nasdaq is the most famous and largest of the over-the-counter markets.  Prior to the establishment of the Nasdaq, the OTC market in the was, in the words of a 1963 SEC investigation "fragmented and obscure."  The NASD was given the responsibility for automating the market.  The result was the National Association of Security Dealers Automated Quotations System.  On February 8, 1971 shares were first traded.  From the small beginnings in 1971 as a small network between dealers, it has evolved into a nationwide computer network able to handle billions of shares per day.

Due to lower listing requirements, the Nasdaq has traditionally been a launching pad for newly public firms.  As these firms matured then tended to move to the larger and more reputable NYSE.  However, as the Nasdaq grew, this movement from towards the NYSE has slowed.  Many large well established firms have recently opted to stay on the Nasdaq.

The Nasdaq has been a major success--partially as a result of its technology orientation and partially as a result the technology companies that are listed on the Nasdaq.  This has led to increases in market capitalization, trading volume, and number of firms listed.   For example by 1994 it was regularly trading more shares than the NYSE.  (it should be noted that the mechanism for counting trades is different and the NASDAQ tends to double count many trades.)  However, a series of academic papers then brought into question whether investors were getting as good of price in the Nasdaq.

In 1998 The NASD and the American Stock Exchange merged.   The combined company still maintains the two markets separately, but many speculate that the AMEX may soon be a memory.
 

                                   Nasdaq                                               AMEX
Number of companies     5000+                                                 approx 800
1998 year end cap     $2.6 Trillion (+ 44.4% since 1997)             $149.7 Billion (-7.7% since 1997
1998 IPOs                         273                                                     21
Total Share Volume         202 Billion                                             7.3 billion
Dollar volume (yearly)     $5.8 Trillion                                            $288 billion
                                                              ( Source 1998 Nasdaq-Amex Backgrounder)
 

The NASD also has markets on the horizon for both Europe and Japan.  In October 1999 they announced plans to launch an Internet based market in Japan.  This idea would eventually be copied here as well.  In the spring of 2000, the Nasdaq

In addition to these markets there are many other newer markets.  These are small in size and are almost exclusively computerized networks but are playing a growing role in after-hour trading as well as institutional trading.  These include Instinet, the Arizona Exchange, the Island, Archipelago, and others.  Collectively these ECNs bring together buyers and sellers and then try to get out of the way.

Instinet is the largest and most widely used of these “small” markets.  It was founded in 1969 and takes no position other than to bring together buyers and sellers.  Until recently, Instinet was available only to large institutional investors.  Now however it is available to smaller investors as well.

The key advantage to these newer smaller markets is the longer hours of trading available to the investor.  Larger institutional traders may get a better price (lower transaction costs) but generally speaking the key is the liquidity and the ability to trade after the markets close.

In face of this increased competition the major markets are planning on extending their own trading hours.
Not to be left without a competitive advantage, Instinet recently announced its plans begin trading fixed income securities.

For an interesting series of reports on ECNs check out the Nightly Business Report's web site (under video clips).
 

Stock Indices
There are many ways to measure how the “market “ is doing.  The most popular in the US are the Dow Jones Industrial Average and the S&P 500

There are many differences between the two indices--most notably, the number of firms.  The Dow has only 30 firms whereas the SP 500 has 500 firms.  Additionally until late 1999  the Dow was made up of exclusively of stocks that trade on the NYSE.  There are now two exceptions (intel and Microsoft who are both Nasdaq-firms.

The major difference in the two indices is in how they are calculated.  The Dow is a price weight index whereas the S&P is a value weighted index.  For information on these indices and how they are calculated, click here.
 
 

Additional links
The NYSE has a very good site.  It includes much academic research and a fascinating timeline.
The Nasdaq and AMEX have worthwhile sites as well.
 

NBR has good notes on ECNs.  It is sort of hard to find.  Go to video clips.

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